Archive for January 2013

Stunning: California Imposes 5-Year Retroactive Tax Bill on Startup Investors

January 30, 2013

Thanks to an entrepreneur, Brian Overstreet, we in California are just starting to learn that the state Franchise Tax Board has cancelled the Qualified Small Business (QSB) tax benefits and is retroactively denying the benefits for the past five years.

Overstreet explained in a column in Xconomy that the QSB was designed to incentivize people starting business to keep them in California. If so, founders and early investors could exclude 50 percent of the taxable gain on the sale of their stock—meaning about 4.5 percent instead of 9 percent (now nearly 13 percent due to Proposition 30).

“Without the QSB provision, we might have decamped to a more tax- and business-friendly state,” he wrote. “After we completed the sale, I paid both my federal and state estimated taxes computed with the QSB exclusion. I thought I was clear until April 2013.”

But, on December 21, the FTB retroactively disqualified all exclusions and deferrals going all the way back to 2008.

How this came about is due, in part, to the FTB overreacting to a court ruling.

“What does this mean for you?” asks Overstreet.

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

He adds, “Just at the moment when California is retroactively taxing entrepreneurs, the federal government is extending the federal QSB benefit.”

Those affected will pay no federal capital gains tax, and in some states, no state taxes—but in California will pay up to 13 percent.

“Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

“California changed the rules after the fact, and that’s just not right. More importantly, the FTB’s radical action is going to send a terrifying message that will have the unintended consequence of driving young, growing businesses to friendlier environments.”

Overstreet is correct—when it is right or moral to penalize  taxpayers who did nothing wrong? Nonetheless, my instinct tells me that entrepreneurs, inventors, investors and venture firms better pay those bills on time.

Congratulations to Xconomy for breaking this story, which still has gone under-reported.

See Brian Overstreet’s column at “California To Hit Startup Founders with Big Retroactive Tax Bills.”

An excellent story that explains the series of events written by Wade Roush, Xconomy’s chief correspondent and editor of Xconomy San Francisco, is “The Surreal, Ironic Story Behind California’s Retroactive Tax on Small Business Investors.”

The court decision is Cutler v. Franchise Tax Board.

Deloitte issued an alert entitled “California Franchise Tax Board Notice Implements Court of Appeal Decision Involving Qualified Small Business Stock Gain Exclusion/Deferral.”

California Politicians Owe Golfer Phil Mickelson an Apology

January 25, 2013

Political correctness in California has become so bizarre that a high-achieving citizen paying huge amounts in taxes is ostracized if he even mildly complains about those taxes.

Pro golfer Phil Mickelson has suggested “drastic changes” were in store for him – including possibly moving out of California – because of changes in federal and state taxes that puts him in an absurdly high tax category. The big tax bite was the reason behind his decision not to be part of the new ownership group of the San Diego Padres.

But the nation now has a class-warrior chorus that will defend reckless tax-and-spend policies in Sacramento and Washington while bullying people who dare speak the truth about their own tax quandaries.

An example can be seen in a Forbes online column that advises Mickelson: “Please stop whining and give thanks for being able to earn a fabulous living playing a game and selling golf clubs (even after tax). 99.999% of people would never have that option, no matter how hard they worked on their swing.” The writer should look up the definition of “whine” because that is not what the golfer was doing.

Apparently a backlash prompted Mickelson to apologize for airing his views, saying, “Finances and taxes are a personal matter and I should not have made my opinions on them public. I apologize to those I have upset or insulted and assure you I intend to not let it happen again.”

Hank Gola of the New York Daily News got it right in declaring that “Mickelson doesn’t have to apologize for anything. It’s almost more offensive that he feels compelled to apologize. He said nothing wrong. The worst thing he’s guilty of is a minor public relations gaffe …. Let’s look at Mickelson’s ‘controversial’ quotes from Sunday. He said he might have to make ‘drastic changes’ because he was in the ‘(income) zone’ being ‘targeted both federally and by the state’ and that it ‘doesn’t work’ for him right now.”

That is hardly polarizing, offensive or insulting. His comments were tame.

I think the apology should be the other way around with Gov. Jerry Brown, Senate President pro Tem Darrell Steinberg, and Assembly Speaker John A. Pérez apologizing to Mickelson and the rest of us for their irresponsible spending and tax-greedy ways.

I’ll be even more provocative and declare Brown, Steinberg and Pérez to be immoral for their support of Proposition 30, which passed in November. It increased income taxes and did so in an disgraceful manner – it raised taxes retroactively to January 1st of 2012.


That’s OK with California’s politicians? Imagine if a home builder said, “We’re glad you bought that house from us in November, but we’re sending you a bill for the higher amount we wanted you to pay in January – and you have to pay it or you’ll be fined or go to jail.” Or imagine a car dealer billing you for the difference between a higher January price compared to your end-of-year purchase price. Or similar acts by your dry cleaner. Or your doctor. Can you imagine the public outrage?

If a retroactive tax doesn’t prove that Sacramento’s politicians are guilty of far more than a golfer making a few bland statements, what will? (Here’s an idea: How about some retroactive budget cuts?)

Phil Mickelson is hardly alone in his thinking. According to the Manhattan Institute for Policy Research, in their report The Great California Exodus: A Closer Look, “For the past two decades, California has been sending more people to other American states than it receives from them. Since 1990, the state has lost nearly 3.4 million residents through this migration.”

Mickelson would also be in synch with his golfing colleagues Tiger Woods and Natalie Gulbis and also with equipment manufacturers Calloway Golf and Feel Golf. All have exited California for kinder, gentler, low-tax states.

It’s been said that Tiger Woods saved many millions in taxes when he moved from California to income-tax free Florida. In the aftermath of Mickelson’s comments he said, “I moved out of here back in ‘96 for that reason. I enjoy Florida but it was also…I understand what [Mickelson] was I think trying to say.”

Several years ago, Natalie Gulbis, a golfer in the LPGA, left Sacramento for an income-tax-free state, Nevada, before her biggest paydays as a professional athlete. Also, Scott McCarron on his PGA tour amassed considerable earnings and moved to Reno with taxes a consideration.

In 2011, Feel Golf Co., after acquiring Pro Line Sports, Inc. relocated its headquarters from Salinas in Monterey County to Sanford, Florida, with CEO Lee Miller stating, “We believe consolidating operations increases mutual synergies while significantly reduce operating costs. Florida also has tax advantages over California for the company and employees.”

A year earlier Callaway Golf Co. moved most manufacturing out of Carlsbad in San Diego County to Monterrey, Mexico. George Fellows, CEO, said, “This decision… supports the gross margin improvements necessary to secure our leadership position in a competitive market.” Moreover, the company outsourced distribution to Ryder Logistics and the bulk of that Carlsbad work moved to Dallas in income tax-free Texas.

I continually hear from business owners who tell me of their struggles with California’s tax maneuvering. Some worry about future abuses, with one client asking, “What’s to prevent Sacramento from passing a tax increase that’s retroactive back to five years?”

Another California relocation may occur even though it doesn’t seem to have anything to do with taxes: It looks like the Sacramento Kings will become the Seattle SuperSonics. If the NBA approves, the move will occur in time for the next season. Plans fell apart in 2011 for the Kings to move to Anaheim, which put Seattle in a better position to close the deal.

Kings players who relocate to Seattle will find that Washington is another state with no income tax. That fact may interest many Californians who are teed-off by the state’s outrageous retroactive tax hike.

Joseph Vranich of Spectrum Location Solutions helps companies find great locations in which to grow. He also is a keynote speaker on business growth and public policies that help companies thrive. His recent emphasis is on why companies leave California.

Golfers Get ‘Hole in One’ Leaving ‘In the Rough’ California for States with Greener Grass

January 22, 2013

This post has been removed in light of new events and is replaced by California Politicians Owe Golfer Phil Mickelson an Apology, published Jan. 24, 2013.

California: Substantial Financial Sector Employment Losses

January 9, 2013

The Los Angeles and San Francisco areas are showing big losses in financial services jobs with work being shifted to other regions of the nation. In the 2007-2012 period, the losses in the Los Angeles area were 21 percent, while in the San Francisco area the losses reached 17 percent. Combined, their losses exceeded that of the New York combined statistical area, which had three times as many financial sector jobs in 2007. San Diego also experienced a 5 percent job loss, while Sacramento’s loss was miniscule.

Overall, California lost 17 percent of its financial sector jobs between 2007 and 2012 while such jobs grew elsewhere. The Los Angeles statistical area includes Riverside-San Bernardino and San Francisco’s includes San Jose.

Furthermore, New York, Boston and Chicago also lost such jobs. (I see something noteworthy: All are high-cost cities in business-unfriendly states.) There is also a strong trend of financial sector job gains where housing is more affordable and job losses where housing is less affordable. See NewGeography’s The Dispersion of Financial Sector Jobs, which is the conclusion of an analysis of data supplied by Moody’s Analytics for an article in The Wall Street Journal Meet Them in St. Louis: Bankers Move (accompanied by a map and data table).